Fin 4319-Record C1 Flashcards Preview

what is credit traunching?

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what are the assumptions, and inputs, are they using a good model?

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how does duration apply to common stocks?

see Macaulay duration

4

what is equity beta correlates with Macaulay duration?

it has a direct correlation, a longer duration has more beta and a shorter duration has less beta

5

what is equity beta?

A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

6

if you're young and you have long time to retirement, what kind of stocks should you buy? growth or public utilities?

For common stocks, what causes required return to change independently of expected growth rate?

what cause the change in the individual companies risk premium?

a change in the individual companies beta

14

what kind of change in i (nominal rate) - g (growth rate)?

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what can cause the market's risk premium to change?

change in the market risk premium is caused by a 1) change in average level of risk aversion or in a change in perceived market risk itself, 2) reprice in risk in overall marketplace, or 3) change of risk in an individual company

16

what does Macaulay duration measure for common stocks?

sensitivity to stock prices to a change in risk premium

17

when trading discount of expensive level with duration long, what should be the case?

stock prices should be sensitivity to changes to investors willingness to bear risk. these are small changes in fear and greed.

18

how is a mortgage different from bond?

mortgage is amortized loan, a bond is a balloon loan.

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what is amortized loan?

A loan with scheduled periodic payments of both principal and interest. This is opposed to loans with interest-only payment features, balloon payment features and even negatively amortizing payment features.

20

if interest rates go from 15% to 4%, what does it do to the value of house?

it increases the value of house greatly

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What is LTV?

Loan To Value

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What is PTI?

Payment to income ratio. Front end PTI: no more than 28% of AGI on monthly basis, pretax income. Debt, credit card payments, car payments, and mortgage loan.

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What is PMI?

Private mortgage insurance (put down 20% to avoid PMI).

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Why are house prices low even though interest rates are low?

Because of the recession, people lost a lot of money but normally low interest increase prices.

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What will happen in next 20-30 years?

In the next 20-30 years, we'll have headwinds with rising interest rates and values of house will down.

26

what is a pay option ARM, interest only payment?

payment optional for first 6 months, interest only, payment very small, no amortization, what happens after 5 years you pay the entire loan value.

27

what if you want to rent an apartment?

they want first and last month deposit and verify income, see tax returns, credit score. it's harder to rent then buy which caused the real estate bubble.

28

what caused the housing bubble?

lack of underwriting - no one checking default risk - they used credit score to your probability to default

29

how did they qualify people for loans during 2005?

they used the beginning interest rate which is very low for Adjustable Rate Mortgage (ARM) or interest only loan to qualify people for loan, the idea is people would refinance at the end of the ARM or sell their house for profit before the balloon payment was due.

30

when people started defaulting, they stopped allowing these loans

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31

why is real estate bubble worse than dot com bubble?

dot come bubble was in equities, when they lost money in stock market, they just lost money and went back to work, but in real estate bubble, they lost their house, and it's harder to come back

32

convexity of affordability curve.

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33

in the old days 1982, what happened to banks when the yield curve inverted?

when interest rates went from single to double digits the entire industry went under. they had loans with low interest rate, but had CD's with high yields, so they were losing moneythey changed the accounting rules to try to get back to positive net worthcongress passed a law that allowed ARM, adjustable rate mortgagesbanks were insolvent so they didn't make ARM loans.in 1986 they bailed out savings and loans industry

34

which duration is longer 30 yr bond or 30 yr mortgage?

mortgage is a stream of equal monthly payments, bond is stream smaller monthly or semiannual interest only payments, and after 30 years, one huge cash flow..